1. Money supply, like money demand, is a stock variable. The total stock of money in circulation among the public at a particular point of time is called money supply.
2. RBI publishes figures for four alternative measures of money supply, viz. M1, M2, M3 and M4.
| M1 = CU + DD M2 = M1 + Savings deposits with Post Office savings banks. M3 = M1 + Net time deposits of commercial banks. M4 = M3 + Total deposits with Post Office savings organisations (excluding National Savings Certificates). |
3. Where, CU is currency (notes plus coins) held by the public and DD is net demand deposits held by commercial banks.
4. The word ‘net’ implies that only deposits of the public held by the banks are to be included in money supply. The interbank deposits, which a commercial bank holds in other commercial banks, are not to be regarded as part of money supply.
5. M1 and M2 are known as narrow money.
6. M3 and M4 are known as broad money.
7. These measures are in decreasing order of liquidity. M1 is most liquid and easiest for transactions whereas M4 is least liquid of all.
8. M3 is the most commonly used measure of money supply. It is also known as aggregate monetary resources.
High Powered Money/ Reserve Money (M0)
The reserve money forms the monetary base of an economy.
| Reserve Money (M0) = Currency in circulation + Bankers’ Deposits with the RBI + ‘Other’ deposits with the RBI. |
Other’ deposits with RBI comprise mainly:
- Deposits of quasi-government; other financial institutions including primary dealers,
- Balances in the accounts of foreign Central Banks and Governments,
- Accounts of international agencies such as the International Monetary Fund.